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Practice Session 4 Cost of Capital

The document contains 4 examples calculating the weighted average cost of capital (WACC) for different companies using information about their capital structure, costs of debt and equity, tax rates, and other financial details. The examples provide the necessary calculations to determine a company's after-tax cost of debt, after-tax cost of equity, and overall WACC based on the given capital structure weights.

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Safi Sheikh
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150 views1 page

Practice Session 4 Cost of Capital

The document contains 4 examples calculating the weighted average cost of capital (WACC) for different companies using information about their capital structure, costs of debt and equity, tax rates, and other financial details. The examples provide the necessary calculations to determine a company's after-tax cost of debt, after-tax cost of equity, and overall WACC based on the given capital structure weights.

Uploaded by

Safi Sheikh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Topic : Cost of Capital

1) The market value of your firm’s equity is $500 million, which is also the value of your total debt.
Your cost of debt (rd) is 6% and your cost of equity is (re) is 10%. What is your weighted average
cost of capital (WACC) if your tax rate is 40%?

2) Fuerst Cola has 10,000 bonds and 400,000 shares outstanding. The bonds have a 10% annual
coupon, $1,000 face value, $1,050 market value, and 10-year maturity. The beta on the stock is
1.30 and its price per share is $40. The risk-less return is 6%, the expected market return is 14%,
and Fuerst Cola’s tax rate is 40%.

1. What is the after-tax cost of debt financing?

2. What is the after-tax cost of equity financing?

3. What is the WACC

3) A company has the following information:

 A target capital structure of 40% debt and 60% equity.


 $1,000 par value bonds pay 10% coupon (semi-annual payments), mature in 20 years, and sell
for $849.54.
 The company stock beta is 1.2.
 Risk-free rate is 10%, and market risk premium is 5%.
 The company's marginal tax rate is 40%.

Calculate the weighted average cost of capital (WACC)?

4) A company has the following capital structure:

 Target weightings: 30% debt, 20% preferred stock, 50% common equity.
 Tax Rate: 35%.
 The firm can issue $1,000 face value, 7% semi-annual coupon debt with a 15-year maturity for a
price of $1,047.46.
 A preferred stock issue that pays a dividend of $2.80 has a value of $35 per share.
 The company’s growth rate is estimated at 6%.
 The company's common shares have a value of $40 and a dividend in year 0 of D 0 = $3.00.

Calculate the company's weighted average cost of capital?

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